Monday, May 31, 2010

Localized inflation

One thing I have in common with "buy local" activists is we both like to imagine what a world would look like if everyone bought locally-produced goods instead of importing things from away.

The difference between us is they imagine themselves as barons and queens of an Eden-like paradise where I see a huddled clutch of hungry serfs.

The good news is that a voluntary localist system will break down long before the residents are pushed into grinding poverty, so my distopian image will not actually occur.

The idea of trapping money in the community sounds really good to the casual observer, but as I've said before it confuses green pieces of paper with wealth. Money is just a proxy for resources, and it's resources that make society wealthy.

Because localist strategies use inefficient means and must charge higher prices, the actual purchasing power in a community will go down. The more local purchases take place, the higher costs will go up. This "localized inflation" means that individuals may have more and more cash on hand, but it will buy less and less stuff. This will increase the temptation to buy from outside the community, where goods are cheap.

It's like what happens with the OPEC cartel. The members agree to produce less oil so the value per barrel goes up. As the value of oil rises, the temptation to break the agreement also rises because of greed. Because OPEC has no way to enforce the agreement, it always breaks down.

So the more a community shifts purchases to local producers, the higher prices will rise and the more tempting outside goods become. In this way, localized inflation will destroy any voluntary "buy local" campaign.


  1. Rosa Scarcelli, a Democrat gubernatorial primary candidate has proposed the creation of a Maine State Bank - which seems to be riding on the wave of "localism."

    I'm wary of the idea myself and wonder if it would contribute to the problem you've outlined in your post.

  2. This part: "individuals may have more and more cash on hand, but it will buy less and less stuff." is not necessarily accurate without an analysis of the price elasticity of supply for the local goods. Without that information, you can't know for sure whether more money will in fact buy less goods, or more.
    Also, your scenario conflicts with itself. The only way the money supply would increase in a certain local area ("...more and more cash on hand....") is for "outsiders" to be spending money on the "local" goods or services. However, if this were the case, the increase in money would correspond to an increase in real income in the "local" area, thus, by definition, cancelling your inflation scenario.
    Certainly there's an efficiency criticism to buying certain goods and services locally, but your argument that "buy local" movements necessarily harm local wealth and productivity is inexact at best.